The Term Loan is the primary source of long-term debt raised by the companies to finance the acquisition of fixed assets and working capital margin. It is also called as a term finance which means the money raised through the term loans is generally repayable in regular payments i.e. fixed number of installments over a period of time.
Advantages of Term Loan
- Interest on debt is tax-deductible, whereas the equity or preference dividends are paid out of profit after tax.
- An issue cost of debt is less expensive as compared to the preference and equity capital.
- The maturity of the debt instrument can be altered with respect to the funds requirements in the firm.
- Disadvantages of Term Loan
- The firm is legally obliged to pay the fixed interest and principal amount to the lenders, the failure of which could lead to its bankruptcy.
The rupee term loan is generally given directly to the organizations for setting up new projects or buying new capital assets. Whereas, the currency loan is given to meet the expenses incurred in importing the machinery or equipment or paying the fees against the foreign technical know-how. The term loan is typically a secured borrowing, as the assets against which the loan is raised is called the prime security while the other assets may serve as a collateral security